Course Outline for
ALTERNATIVE MODES OF ECONOMIC GOVERNANCE
a short course given at the
NAKE Workshop The Hague, The Netherlands, June 10-14, 2002
Avinash Dixit, Princeton University
MOTIVATION AND OUTLINE
In most economic interactions, one or both or all parties have incentives to cheat
others. Contracts are intended to prevent such behavior, and thereby allow efficient and
mutually beneficial exchanges to take place. In modern advanced economies, the
state’s official legal system provides economic governance (contract enforcement),
but it is limited by information constraints. Therefore many transactions are organized
privately "in the shadow of the law". In other countries and at other times,
individuals and groups have to devise their own mechanisms of governance, and these are
limited by the need to be self-enforcing (subgame-perfect).
In this brief course we will give an overview of the general issues and discuss a few
of them in greater depth using formal models.
CONTRACTS UNDER AN OFFICIAL LEGAL SYSTEM
Essential reading:
- George Baker, "The use of performance measures in incentive contracting,"
American Economic Review, Papers and Proceedings, 90(2), May 2000, 415-420.
- George Baker, Robert Gibbons, and Kevin J. Murphy, "Subjective performance measures
in optimal incentive contracts," Quarterly Journal of Economics, 109, 1994, 1125-56.
General and background reading:
- Oliver Williamson, The Mechanisms of Governance, Oxford University Press, 1996,
especially chs. 3, 4, 6, 10.
- Bernard Salanie, The Economics of Contracts, MIT Press, 1997, especially chs. 2, 5, 7.
PRIVATE PROTECTION OF PROPERTY RIGHTS
Essential reading:
General and background reading:
- Yoram Barzel, Economic Analysis of Property Rights, Cambridge University Press, 1989
- Robert Ellickson, Order Without Law, Harvard University Press, 1991.
PRIVATE GOVERNANCE OF CONTRACTS
Essential reading:
- Shuhe Li, "The benefits and costs of relation-based governance," 1999. Paper
available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=200208
- Avinash Dixit, "Trade expansion and contract enforcement," 2002. Paper
available at http://www.princeton.edu/~dixitak/home/circle.pdf
- Paul Milgrom, Douglass North and Barry Weingast, "The role of institutions in the
revival of trade: The law merchants, private judges, and the Champagne fairs,"
Economics and Politics 2, 1990, 1-23.
- Avinash Dixit, "On modes of economic governance," 2001. Paper available at http://www.princeton.edu/~dixitak/home/govmodes.pdf
General and background reading:
- Drew Fudenberg, "Explaining cooperation and commitment in repeated games," in
Advances in Economic Theory, Vol. I, ed. Jean-Jacques Laffont, Cambridge University Press,
1992.
- Avner Greif, "Microtheory and recent developments in the study of economic
institutions through economic history," in Advances in Economics and Econometrics:
Seventh World Congress, Vol. II, eds. David Kreps and Kenneth Wallis, Cambridge University
Press, 1997.
- Avner Greif, "The fundamental problem of exchange: A research agenda in historical
institutional analysis," European Review of Economic History, 4, 2000, 251-84.
- Jean Ensminger, Making a Market, Cambridge University Press, 1992, chs. 2, 4.
- Diego Gambetta, The Sicilian Mafia, Harvard University Press, 1993.
- James Rauch, "Business and social networks in international trade," Journal of
Economic Literature, 39, 2001, 1177-1203.
- Simon Johnson, John McMillan, and Christopher Woodruff, "Contract enforcement in
transition," CEPR Discussion Paper No. 2081, February 1999.
COLLECTIVE ACTION
Essential Reading:
- Richard Cornes and Todd Sandler, The Theory of Externalities, Public Goods, and Club
Goods, Cambridge University Press, second edition 1996, chs. 9, 10.
- Avinash Dixit and Mancur Olson, "Does voluntary participation undermine the Coase
Theorem?" Journal of Public Economics, 26, 2000, 309-335.
General and background reading:
- Elinor Ostrom, Governing the Commons, Cambridge University Press, 1990.
- Todd Sandler, Collective Action, University of Michigan Press, 1992.
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